Month: August 2021

If you don’t charge a market property rent what expenses can you claim?

There may be times when a property owner decides not to charge a market rent or lets the property rent free. This will mean you will be restricted on the amount of expenses you can claim.

PIM2130 Properties not let at a commercial rent

Expenses incurred by a customer on a property occupied rent free by, for example, a relative are likely to be incurred for personal or philanthropic purposes – to provide that person with a home. The same applies where the property is let at less than a commercial rate or isn’t let on commercial terms.

Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes (PIM2010). So, strictly, they can’t be deducted in arriving at rental business profits. However, if the customer lets a property below the market rate (as opposed to providing it rent-free), they can deduct the expenses of that property up to the rent they get from it. This means that the uncommercially let property produces neither a profit nor a loss, but the excess expenses cannot be carried forward to be used in a later year.

A relative or friend may ‘house sit’ between normal lettings on commercial terms. Provided the property is genuinely available for commercial letting and the landlord is actively seeking tenants they can deduct the expenditure incurred on that property in the normal way. 

PIM2010 – Property Income Manual – HMRC internal manual – GOV.UK (www.gov.uk) states

Wholly and exclusively rule                        

Most of the trading expenses rules are applied to property income (see PIM1100 onwards). This includes the ‘wholly and exclusively’ rule which says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes.

Dual purpose expenditure

Strictly, if an expense is not wholly and exclusively for the purposes of the property business, it may not be deducted. In practice, though, some dual purpose expenses include an obvious part which is for the purposes of the business. We usually allow the deduction of a proportion of expenses like that. 

In summary – rent free or less than market value

  • Its unlikely that the expenses will be incurred wholly and exclusively for business purposes
  • Expenses not incurred for business expenses are excluded or restricted
  • Where a property is let below market rate, you can only deduct expenses up to the value of the rent received
  • You can not use rent free or less market rent to produce a loss for tax purposes. Any excess losses can not be offset against other rental profits or carried forward.

What about Covid?

  • Tenants should continue to pay rent and abide by all other terms of their tenancy agreement to the best of their ability. The government has made a strong package of financial support available to tenants, and where they can pay the rent as normal, they should do. Tenants who are unable to do so should speak to their landlord at the earliest opportunity.
  • In many, if not most cases, the COVID-19 outbreak will not affect tenants’ ability to pay rent. If a tenant’s ability to pay will be affected, it’s important that they have an early conversation with their landlord. Rent levels agreed in the tenancy agreement remain legally due and tenants should discuss with their landlord if they are in difficulty.

Guidance for landlords and tenants – GOV.UK (www.gov.uk)

steve@bicknells.net

How can you claim your £1,000 property allowance?

The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property.

If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income.

It was introduced in Finance Act (No2) 2017.

I have seen may tax payers use it incorrectly on their returns, putting in the allowance and claiming expenses, which is incorrect.

The property allowance applies to

  • UK and Overseas property businesses
  • Commercial and Residential Lettings

There are exclusions

  • Rent a Room – PIM4424
  • Individuals claim the Base Rate Finance Cost Allowance – PIM4460
  • Partnership Property – PIM4454

If your property income from UK and Overseas properties is less than £1,000 you will get full relief and don’t need to file a self assessment return.

If your income is over a £1,000 from UK and Overseas Property then you can choose whether its worthwhile, for example if your expenses exceed £1,000 you would not want to use the allowance as you can claim the actual expenses, there are some examples in PIM4482.

The Property Allowance can not create a property loss to carry forward.

If your property income exceeds £1,000 and you elect to use the Property Allowance, that would be ‘Partial Relief’.

You can choose to either deduct the £1,000 or the actual costs (this is bit I have seen incorrectly noted on tax returns, basically landlords have tried to claim both, which is not allowed)

You can decide on a year by year basis which is better – £1,000 or the actual costs.

Elections must be made by the 31st January following the tax year.

Here is an example from PIM4483

Stephanie computes partial relief as follows:

Step 1 – Calculate Total Receipts of the relevant property business:

The total receipts of the relevant property business is £1,200.

Step 2 – Subtract the Deductible Amount from Receipts:

The £1,000 allowance is subtracted from the total receipts for her property business. This leaves £200 (£1,200 – £1,000) of taxable profits for Stephanie’s property business.

The legal fees of £150 are not brought into account because you cannot claim both the property allowance and expenses.

There is further guidance at PIM4400

steve@bicknells.net

How can a developer buy a residential property SDLT free? Probate Relief

Stamp Duty (SDLT) can be expensive, normally a developer would have have to pay the extra 3% SDLT.

Acquisition by property trader from personal representatives

Finance Act 2003 (legislation.gov.uk)

3 (1) Where a dwelling is acquired by a property trader from the personal representatives
of a deceased individual, the acquisition is exempt from charge if the following
conditions are met.
(2) The conditions are—
(a) that the acquisition is made in the course of a business that consists of
or includes acquiring dwellings from personal representatives of deceased
individuals,
(b) that the deceased individual occupied the dwelling as his only or main
residence at some time in the period of two years ending with the date of
his death,
(c) that the property trader does not intend—
(i) to spend more than the permitted amount on refurbishment of the
dwelling, or
(ii) to grant a lease or licence of the dwelling, or
(iii) to permit any of its principals or employees (or any person connected
with any of its principals or employees) to occupy the dwelling, and
(d) that the area of land acquired does not exceed the permitted area

Meaning of “property trader”
8 (1) A “property trader” means—
(a) a company,
(b) a limited liability partnership, or
(c) a partnership whose members are all either companies or limited liability
partnerships

Meaning of “refurbishment” and “the permitted amount”
9 (1) “Refurbishment”of a dwelling means the carrying out of works that enhance or are
intended to enhance the value of the dwelling, but does not include—
(a) cleaning the dwelling, or
(b) works required solely for the purpose of ensuring that the dwelling meets
minimum safety standards.
(2) The “permitted amount”, in relation to the refurbishment of a dwelling, is—
(a) 10,000, or
(b) 5% of the consideration for the acquisition of the dwelling,
whichever is the greater, but subject to a maximum of £20,000.

This is also covered in SDLTM21040 – Stamp Duty Land Tax Manual – HMRC internal manual – GOV.UK (www.gov.uk)

This could be could be useful in the following circumstances

Property Flipping

Property Flipping is done when you buy a property do a small amount of work to it and then sell it for a profit.

Using this SDLT relief could significantly increase your profit.

Buy Refurbish Refinance Rent (BRRR)

This relief can only be used by a trading company, residential letting doesn’t count as trading. However, you could have a group of companies, one is a development company and one a residential investment company.

The development company buys the Probate Property and gets the relief.

Once its been refurbished the development company could sell the property or transfer it to the investment company.

Groups benefit from Group SDLT relief. Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

steve@bicknells.net